The adjustable-rate mortgage share of mortgage applications reached its 2015 high at 7% in late June, according to Lynn Fisher and Joel Kan at the Mortgage Bankers Association, but it has a long way to go to reach the old normal.

“The highest ARM share recorded in the survey, which goes back to 1990, was 36.6% in March 2005,” they write. “The share also exceeded 34% in 1994 and 2000 when interest rates were relatively high. The historical average for the ARM share is 14.4%.”

According to the MBA researchers, the share of ARMs increases as the spread between the 30 year fixed rate mortgage rate and the ARM rate increases. As rates on popular 30-year are expected to rise, the lure of ARMs, should prove more competitive in mortgage lending.

Furthermore, the share of ARMs decreases in periods with very low interest rates – such as the 4% and below streak the industry has seen for most of the last few years.

“Spreads have recently widened to 117 basis points, the largest spread since October of 2014,” they note.

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(Source: MBA)

Meanwhile, Dodd-Frank regulations have had a big impact.

“The Ability to Repay/Qualified Mortgage rule, implemented in January of 2014, has reduced the feasibility of short reset ARM products, as it mandates that loans be underwritten to the highest rate over the first five years of a loan,” they write. “Nonetheless, given that mortgage interest rates are expected to rise this year and next, the ARM share of applications should continue to increase.”